I wrote a few days ago about the Intel anti-trust settlement with the Federal Trade Commission. Those words stand unchanged but some readers have asked for more so I have given the deal further thought and have what might be a better context in which to place it — Too Big to Fail. This isn’t “too big to fail” in the Bush/Obama big bank context in which failing and stupid institutions are saved at any cost to the public. Intel, in contrast, literally is too big to fail, at least right now.

Everything about the Intel/FTC settlement screams of one thing — Microsoft. Redmond’s multi-year nightmare with the FTC, DoJ, and the attorneys-general of several dozen states wasn’t lost on Intel, which is a more rational company and doesn’t want a Microsoft-like anti-trust experience. Both companies are guilty and both are paying something for that guilt, but Intel clearly wants to avoid the decade of pain and distraction suffered by Microsoft.

For the record, Intel admitted no wrong-doing in the settlement. But they also promised to specifically change their behavior.

What this settlement (and the previous one with AMD) does for Intel is clear the decks for future action. Now Intel can attack new market segments and be aggressive in existing market segments within the rules of the FTC deal.

Microsoft was paralyzed with the FTC breathing down its neck. Intel is not paralyzed.

Roughly $2 billion in payouts and Intel is a free bird — a rich free bird at that — having proved that crime does pay.

These settlements will effectively pay for themselves in two months at current Intel profit levels.

And as a result, Intel management bandwidth is now opened-up, hopefully not for more mischief.

Under the FTC deal Intel will open some patents to AMD and NVIDIA. This is healthy for Intel. If NVIDIA or AMD dies, Intel automatically becomes a monopoly subject to further regulation. So keeping NVIDIA and AMD alive and at least marginally healthy is in intel’s best interest. That’s an important take-away from this column: Intel needs AMD and NVIDIA.

Here’s the other big take-away: Intel has reached a scale on the cost equation where small volume companies can survive but not compete. AMD and NVIDIA survive by the grace of Intel, not despite it.

Intel’s latest gross profit margin is 65 percent!!! The company could easily cut prices and kill both AMD and NVIDIA. But Intel won’t do that. This realization ought to play an important part in AMD and NIVIDIA strategy. AMD gets that, but I think NVIDIA somehow doesn’t.

If NVIDIA and AMD maintain a few percentage points market share it is healthy for the entire ecosystem. Remember that as-is Intel is earning $3 billion per quarter. That’s Microsoft-scale money without the Microsoft-scale problems of a platform shift that risks leaving that company marooned.

This is all good news. So why hasn’t the market rewarded Intel with a big boost in its share price? Because conventional wisdom on Wall Street says that this freed-up management bandwidth will just help Intel launch another money-losing business. Remember the billions lost on Larrabee?

67 Comments

more troubling–all this cheap processing power has drastically driven down costs of computerizing various office and production workflows.

blaming job loss on offshoring and balance of trade issues is appropriate too, but this switchover is now complete: when there is work to be done, the answer is never “hire more people” it’s “what web service takes care of that for us”.

Which is good for workers. Making the poorest people more efficient is what lifted the majority of the population out of poverty during the Industrial Revolution. This process continues, and very few children die from scurvy, rickets, or beri-beri today.

Where a worker can be made more productive, it’s always a good idea. Our biggest problem today is barriers for entry for new businesses.

Chris
August 23, 2010 at 8:51 pm

Barriers for new *inefficient* businesses.

Tim Kane
September 3, 2010 at 9:00 am

Actually, our biggest problem today is the concentation of wealth (i.e. supply) relative to demand. This is a function of workers being more productive, but not making any gains as a result. This, in turn, is a function of workers not having sufficient bargaining power versus their employers.

We are in the biggest demand deficient recession since the 1930s. This is the direct result of 30 years of supply-side bias policies – policies that worked to undermine employee compensation by undermining their bargaining power.

The U.S. is based upon one governing principle: free contract. In such circumstances, bargaining power is everything. Everything that goes on around us, then, represents either individuals, or groups of individuals trying to enhance their bargaining power: be it personal grooming, advertising on T.V. or what goes on in the dens of iniquity on Wall Street and in Washington.

Very clearly corporations know this. Often, IT is their biggest expense. In the late 80s and early 90s people that were laid off, retooled to high skilled jobs in technology. The flood of people into the field didn’t erode bargaining power, and by the end of the 90s, IT people were making a good buck. Enter Bush & Co. Bush never, ever, refused, one single request of Corporations. And what they did was attack the bargaining power of their greatest expense, IT workers. Outsourcing and H1B programs shifted the margins of bargaining power. Any IT worker over 45 couldn’t find a job. The head of IT at Citicorp boasted that in a few years the average cost for IT work would be $25 an hour.

Since 1972 the median wage has remained flat, while productivity has increased over 150%. Corporations have more money now than ever. Clearly, the concentration of wealth is the biggest problem we have, and that is a function of a lack of bargaining power on the part of some very productive workers.

David W.
August 12, 2010 at 12:57 pm

Intel is in trouble, but not because they’ll do something stupid (which they will do), but because their business has changed and they refuse to recognize that.

Intel’s main business was desktop processors. They did an amazing job there and their partnership with Microsoft helped them defeat all other rivals. Unfortunately, that’s not where the market is heading.

Many successful companies have a problem where they believe that the strategy that made them successful a decade ago will work today. Yahoo was originally a website that helped people locate stuff when search technology didn’t do the job. Because of that, Yahoo was busy building itself up as a “portal” (i.e. a place where people would go to find their news, gossip, etc.) while a small startup, Google, was busy improving searches. Once Google’s search engine gave decent results, there was no reason to go to Yahoo’s overly complex page and menu system to find something.

Intel made its money in large, powerful chips. Improvements in processing speed meant you could increase the complexity of the chip. That worked out great when everyone had a big beige box sitting on their desk and running Windows.

But, that’s not where the world is going. The industry is settling on ARM chips in cellphones, gaming units, setup boxes, and tablet computers. Meanwhile Intel is pushing its Atom line of chips as a solution to at least the Netbook computers. But, people aren’t buying Atom based netbooks. They want ARM based iPads.

Sure, sometime in the next few years, the technology will become good enough that maybe Atom chips could be used in these devices, but the ARM based chips are also evolving. By the time the Atom chips are able to be small enough to use in these devices, ARM chips will be as powerful and much cheaper.

Unless Intel gets serious about low cost processors, they’ll find themselves in the same position that Wang and DEC found themselves in when the PC revolution took off.

Have you seen the latest benchmarks of Atom versus ARM? Intel has closed the gap dramatically with Atom in one processor generation and the next is coming on its heels. ARM hasn’t had much competition which is why it’s the defacto standard.Check out some of Anand Chandrasekhr’s slides on the web.

BiiN … blast from the past… worked at Siemens who did the SW while Intel did the HW (i432 anyone lol?). Some neat ideas but waiting over 20 minutes for the OS to boot was not one of them… also batch queuing compiles of the OS on a VAX 750 that took 8 hours to run was just fun fun fun.

agrmarcasepatentes Apple now has Rhapsody as an app, which is a great start, but it is currently hampered by the inability to store locally on your iPod, and has a dismal 64kbps bit rate. If this changes, then it will somewhat negate this advantage for the Zune, but the 10 songs per month will still be a big plus in Zune Pass’ favor.

Maynard Handley
August 12, 2010 at 6:56 pm

“Remember the billions lost on Larrabee?”

I wouldn’t be so pessimistic (and I wouldn’t be so upset at Intel for making high profits). At least so far, Intel remains largely in the hands of engineers. Sure there have been failures that were exacerbated by marketing (P4 to some extent, much more spectacularly Itanium), but Intel does continue to deliver, in an environment where delivering is not easy, and where they could easily become lazy if they were another company. I’m not crazy about many of their decisions, for example if it were up to me, I would have gutted everything but 64-bit mode from Atom — get rid of all this obsolete crap from the 80s — and put the SW world on notice that in the near future the non-Atom CPUs are getting the same treatment — but I have to admire their ability to keep on improving the product.

Certainly Larrabee, unlike Itanium, strikes me as too soon to call a failure. The overwhelming logic behind it is certainly correct — the future is GPUs tightly integrated with CPUs, and it’s in everyone’s interests to have programming the GPU be basically the same thing as programming the CPU, not a completely different programming model with totally different tools, and I suspect the worst you can really say is that the program went public too soon (not even that the research occurred too soon, just that the hype should never have made it to the outside world).

Likewise Intel have delivered on USB3 (though later than I would have liked, and the lack of chipset support today is pretty pathetic), have done a sterling job of redefining what is acceptable and below acceptable in SSDs, and more quietly in constantly improving what is considered the minimum acceptable performance for RAM; and they appear poised to deliver optical communication and Light Peak to the home this year or early next year.

All in all an impressive record, and evidence that those profits are not quite being wasted. There are missteps, sure, from the inane matrix of three thousand different Nehalem models, all with different features, to delivering ONLY Arrandales with on-board GPUs, even though those GPUs are inadequate for some purposes. (And yeah, I appreciate the irony of, in the same sentence complaining about both too many models and missing models.) But looking at the big picture, I’m willing to give them a little slack.

Jordan
August 12, 2010 at 7:24 pm

I know you’re busy running across the country, but I was wondering: what happened to Adam Smith’s Money World?

The last posting I saw there was in May. And from Adam? Even longer ago.

Matt
August 13, 2010 at 5:54 am

I have the same question. I enjoyed your economic articles over on Adam Smith Money World.

Tyler Durden
August 12, 2010 at 8:20 pm

There was an apocryphal quote when I was at Intel attributed to Gordon Moore that went something along the lines of… “AMD will have 15% market share–but they won’t enjoy it.” That is, AMD and NVIDIA are kept in check. They get just enough share–and of the least profitable variety–to keep the Feds at bay, but not so much that Intel is ever truly threatened.

DJ
August 12, 2010 at 9:06 pm

Reminds me of John DeLorean’s book about GM in the ’60’s. Once he rose high enough in the company & knew the financials, he realized GM could drop their prices, still make a profit, & put Ford & Chrysler out of business anytime they wanted. But then they’d have to deal with the government……

Fissile
August 25, 2010 at 10:28 am

Back in the early 60’s, Delorean claimed that GM could snuff Chrysler by dropping the price of GM cars by $25, and make Ford go tango-uniform by dropping GM car prices by $50 per unit. The only reason it wasn’t done, was because GM already had a 50% market share in North American, and was on the verge of a government anti-trust action. Fast forward to 2010, Ford is the only player left standing. Chrysler being owned by the Italians and GM owned by Washington DC — literally Government Motors, although I prefer to refer to them as American Leyland.

Considering the above business example, I can’t agree with Bob that this deal means things will be going all Intel’s way from here on out. After all, fortune is a bitch goddess.

Could you please go into a little more detail about Intel’s business model? Specifically, how is it possible that they’re able to bring in $3B / quarter, and no other competitor is able to copy their business model and undercut them? I’d be very interested to know.

Government protection – patent monopolies. Now they have some more government protection in other areas of their business. Regulations and settlements always protect the incumbent. A Bob said, 2-months profits.

Hire lots of world class chip designers (many of which work for the competition), give them 5-10 years and 100’s of millions of dollars, invest 100’s of millions of dollars in production capacity, convince every PC maker and PC software firm on the planet to support your product, then be prepared to sell it at 1/5 the market price. One can assume that if a competitor would appear, Intel could cut their price that much.

While you are working on a product, Intel has 5-10 years to build on their technology. You may never catch up with them.

anonym
August 15, 2010 at 3:19 pm

It’s still an interesting question why we haven’t seen a microprocessor Airbus built up by governments in Europe (or perhaps by Japan or Taiwan) to take on Intel’s Boeing. Going head to head with Boeing is pretty capital-intensive too. I suspect the x86 patents play an important role in that. (It’s strange how many people still seem to believe that x86 is a de facto open standard.)

It is a de facto standard, thanks to M$. There’s a reason it used to be called the Wintel monopoly. To the extent that linux gains traction in the Fortune X00, Intel’s days are numbered. We could well see the return of client/server with the server on an ARM/PPC/whatever chip running linux, and desktops running something like Xwin. Lots cheaper, and could keep the drones from wasting 6 hours of the day watching pron.

jck
August 17, 2010 at 12:28 pm

never say never.

JT
August 18, 2010 at 8:01 am

Intel has succeeded over the last decade due to their ability to open many cutting edge technology fabs coupled with generous application of marketing power (including strong-arming). Now that AMD can use 3rd party fabs they potentially have as much volume capacity as Intel albeit presently a generation or two behind. From a design standpoint Intel has been absolutely horrible with their R&D investment over the last decade. AMD and nVidia combined have R&D budgets that are still a fraction of Intel’s but on graphics they are way ahead and AMD has been both ahead and behind in CPU design over the last decade.

So the real question is how much do we need the bleeding edge CPU and for how much of the market? Clearly AMD and nVidia have to ability to be technologically competitive with much smaller budgets, not to mention the ARM ecosystem. I suspect that we will see a period of fantastic Intel earnings for a few years and then slowly the big fab houses (TSMC, UTMC, GF) will close the process gap (because they now have customers that need them to). Once the gap is narrowed Intel will have to do a much better job investing their resources than they have historically because they will no longer be able to rely on the factories as a competitive barrier.

It’s the wIntel monopoly. They need each other. There’s a reason linux will run just fine on PIII machine. There’s also a reason for Windows X every couple of years: Intel needs some bloated software to suck up all that compute power that happens with each chip change. That’s another reason they both would rather ARM just go away.

The Corporation would be a whole lot more efficient, and cheaper to run, if it weren’t for Windoze.

I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)

I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X,

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